Household debt has continued to increase after a decade of US economic growth. Household debt now exceeds $14 trillion, more than $1 trillion more than is was during the last peak in 2008. This has created a debate over the implications that high debt levels may have on the economy and the credit markets going forward.
Many economists have shrugged off the increase in household debt outstanding. They cite the house-hold debt service ratio which shows that the average household’s debt payments are quite manageable. Currently, household debt payments represent just 10% of household income. This is much lower than the high of 15% in 2008. This has caused many economists to argue that while the total owed by households is quite high the combination of higher incomes and low interest rates makes the debt payments affordable.
Other less sanguine economists worry about the impact that high household debt may have on the debt cycle. The debt cycle is a term used to describe the increase in debt that accumulates during economic expansions as consumers borrow on their future income to make purchases in the current period. Eventually this debt becomes a burden and consumers cut spending to pay down debt or increase saving which may lead to an economic recession. These economists watch household debt indicators closely for signs that the debt cycle may be reversing.
While household debt continues to rise there are some signs that the debt burden may be mounting to the point that it is becoming unsustainable for many households. Recently, the American Bankruptcy Institute released data showing that US bankruptcy filings have been on the rise. In July, US bankruptcies were 3% higher than they were a year ago. This represents the first increase in eight years. This is somewhat surprising given that the labor market has remained quite strong and personal incomes have continued to increase.
Part of the reason for the discrepancy in household incomes and bankruptcy filings is the type of debt that households owe. Unlike the last economic cycle, non-housing debt appears to be a larger problem whereas mortgage debt has increased at a far slower pace. Mortgage debt is still 3.4% below its peak from September 2008. Meanwhile, non-mortgage debt, which includes student loans, auto loans, and credit card balances have increased nearly 50% from $2.69 trillion to $4.02 trillion over the same time period. It can be speculated that many mortgage lenders are now holding borrowers to higher standards while consumer lenders may still be willing to extend credit, in the form of credit card debt and subprime auto loans, to borrowers who may not have the income or other financial means to repay the loans.
This has especially become a problem among seniors. Statistics show that the Baby Boomer Generation as a group has not sufficiently saved for retirement. Now that the older cohort of the Baby Boomer Generation has been retired for many years many are running out of money or have had to deal with an unanticipated financial emergency which is forcing them into bankruptcy. If this is in fact the case bankruptcies could continue to increase as the US population continues to age and more and more senior households are forced to bankruptcy to discharge their debts.